Net worth meaning (and why you should know yours)
Your net worth shouldn't define your happiness, but it is important to track.
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Your net worth is the value of all your assets, minus all of your liabilities. While you shouldn’t let this number define your happiness, it’s important to know your net worth and track it over time. That way, you can tell how close you are to financial independence and how much progress you’re making on your financial journey.
What is net worth
Net worth is the total value of all of your assets—including cash, stocks, bonds, properties, money you’re owed, etc.—minus all of your debts.
Net worth is used by banks and investment advisors to assess an individual’s creditworthiness and their sophistication as an investor. While the number can be an indication of how much someone knows about managing their money, it’s not an all-important number. And, it has nothing to do with taxes—except for inheritance tax (and, if someone is worried about your net worth for that reason, then you have bigger problems).
How to calculate net worth
It doesn’t take any complex math to figure out your net worth. All you do is add up the total value of your cash and all other assets, and then subtract all of your outstanding liabilities.
Here are some items that should be included in both your assets and liabilities:
|Cash||Credit card balances|
|Real estate||Car loans|
|Money you’re owed||Payments remaining on a home or car lease (over the full remaining term of the lease)|
When totaling the values of your assets, be sure to be conservative. You may even want to discount asset values slightly. Your goal is to figure out how much these assets would be worth if you wanted or needed to convert them into cash.
And as for liabilities, be sure to include any money you owe anyone for any reason, whether it’s a mortgage that’s tied to a specific asset, credit card debt, student loans, or unpaid medical bills.
If you want to know more about calculating your net worth or want to see where your net worth stands, be sure to check out this article with our net worth calculator.
Net worth meaning
Net worth has very little meaning outside of simple math. It’s just the value of your assets, less your debts—basically, it’s how much you would have left if you sold everything and paid off all your debt.
Or, if the number is negative, then it’s how much you need to accumulate in order to have enough assets to pay off all your debts if you did sell everything.
If the number is negative, then you may also qualify for protection under U.S. bankruptcy law. We wouldn’t necessarily recommend filing for bankruptcy, because it can really mess up your credit. But, it could be an option.
Why you should know your net worth
Knowing your net worth is important because it gives you an accurate snapshot of the state of your finances—how you’re doing, how comfortable you are, etc.
Knowing your net worth can also tell you how close you are to achieving financial independence. (The general rule of thumb for achieving FI/RE is that your net worth should be 25x your annual expenses.)
Tracking over time also helps you know whether you’re spending too much. If your net worth consistently declines month-over-month or year-over-year, then you may need to reassess your household budget or your investment strategy.
Lastly, net worth is a common item that you’ll need to know when opening a bank or brokerage account. In some cases, you need to have a net worth over a certain amount in order to invest in certain things. So, knowing your net worth upfront can help you know whether you’re eligible for certain investments and make opening new accounts easier.
When net worth matters
You don’t really need millions to retire, but it’s definitely a good idea to track your net worth to know how close you are to financial independence and to track your progress on your financial journey.
Here are some other times when your net worth matters:
- When you’re buying real estate
- When you’re thinking about changing jobs or leaving full-time employment
- If you want to invest in certain real estate and private equity deals
Some investments require you to be an accredited investor. The SEC has set several criteria that investors can meet in order to be accredited, one of which is to have a net worth of over $1 million.
Things to consider when calculating your net worth
When you’re ready to calculate your net worth, there are some things that make it tough to calculate—your home value, for example. In these cases, it’s best to take a conservative approach. For example, when valuing real estate, consider using a discounted value, because (1) you may not be able to sell the property for the full asking price, and (2) you’d likely have to pay selling costs if you actually wanted to sell the asset, such as commissions to a real estate agent.
It’s also important to remember when considering your net worth that this single number shouldn’t totally dictate your financial decisions, nor should it determine your happiness. Plus, it’s going to fluctuate over time—and that’s alright. The important thing is to know how to calculate your net worth, track it over time to follow your progress, and know when and why it matters.